Debts of despair

The recent warning from Citizens Advice that millions of people face a lifetime of debt has enormous long-term implications for the financial services industry and society as a whole.

A report published by the charity reveals that its debt clients owe an average of 13,153 – almost a third more than they did three years ago and the equivalent of 17.5 times their total monthly household income. It will take them an average of 77 years to pay off the money they owe at a rate they can afford.

Consumer credit problems brought to CAB have doubled over the last eight years, accounting for three-quarters of the 1.25 million new debt cases dealt with by the national network last year.

Most of CAB’s debt clients are low-income families. They face a lifetime of poverty and no real hope of ever being able to pay off their debts. But it is not just low-income families that are getting into financial trouble. Barclays Bank has just reported a 44 per cent rise in bad debt to 1.1bn.

The ease with which individuals can obtain credit has fuelled the consumer boom of the past few years and is only now running out of steam in the face of rising household overheads.

There are other factors at work, too. It is questionable whether the last Conservative Government really thought through the long-term implications of replacing student maintenance grants with student loans. Graduates leaving university owe an average of 13,500, according to a recent Barclays survey.

The situation has been exacerbated by the introduction of tuition fees by the current Labour Government and the situation is getting steadily worse for the mass of middle-class graduates.

From this autumn, the top-up fee generation will have an additional 5,400 to 8,400 added to its university bill and Barclays Bank has estimated that by 2010 the average debt for graduates could reach a colossal 33,700.

The effects of this burden of debt – which no earlier generation had to bear – are already filtering through to the housing market, with the average age of first-time buyers now 33 and the proportion of loans to first-time buyers at a 20-year low at around 30 per cent of all house purchase advances.

This compares with the long-term average of around 50 per cent. With no relief in sight for the legions of indebted graduates, there is little hope of any return to the long-term average.

The implications for the housing market are serious. First-time buyers provide the necessary liquidity to the market and, with a big reduction in their numbers, other homeowners will find it increasingly difficult to move.

The current generation of middle-aged homeowners found it difficult to pay the mortgage, educate the children and save for their retirement. How much more difficult will it be for those leaving university today with debts of 20,000 to pay off before they even consider taking on a home loan?

With first-time buyers now being forced to borrow anything up to five times their gross earnings, and in most cases needing two incomes to buy a home at all, the upshot will be that even fewer individuals will be able to save for retirement.

The effect will be that growth in the pension market will stagnate. The same applies to other forms of savings including Isas, investment life policies (if anybody is still buying them) and equity-backed regular-saving schemes.

If they do not buy a home of their own until later in life, they will undoubtedly also defer purchase of protection insurance. By the time they are in their mid-30s and need cover, many will be unable to afford the higher premiums.

This is already the case with mortgage payment protection insurance although there is plenty of scope for providers to reduce premiums on these policies.

Meanwhile, the Government is exhorting us all to save more for retirement when vast numbers of hard-working individuals still cannot afford to put a roof over their heads.

None of this bodes well for the financial services industry. The Government should be considering cutting income tax and raising the personal tax allowances if it wants to avoid a crisis. Money Marketing50 Poland Street, London W1F 7AX

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